Northam Blinks: State Tax Cuts Coming

by Steve HanerFirst published by the Thomas Jefferson Institute for Public Policy.

Virginia’s leaders are no longer debating whether to cut state taxes. The argument now will be over how to cut state taxes.

Outgoing Democratic Governor Ralph Northam announced Tuesday that his final introduced budget will include $2.1 billion in lower taxes, created by a one-time rebate to all taxpayers, a one-time tax break for certain businesses, and two small changes with long term benefits.

Incoming Republican Governor Glenn Youngkin, on the other hand, has proposed a similar one-time tax rebate to all taxpayers. But his other tax proposals are far broader and deeper than Northam’s and will probably require some trimming in parts of the introduced budget coming from Northam. The actual budget proposal is to be released later this week.

Youngkin had asked Northam to include tax reform in his package, and to his credit Northam did. It is the 2022 General Assembly which will make the big decisions on how and by how much taxes will go down, and for whom, but they now enjoy a $2.1 billion head start.

“Gov. Northam’s budget proposal is a step in the right direction but does not entirely fulfill Virginians’ mandate,” said Youngkin transition spokeswoman Macaulay Porter.

“We appreciate the Northam administration laying the foundation for these elements of the Day One game plan so that Gov.-elect Youngkin can hit the ground running on Jan. 15 to begin executing on his key campaign promises and finish the job.”

The admission from the outgoing governor that tax cuts are in order is gratifying. The message was very different during the campaign just completed. The Thomas Jefferson Institute spotlighted the state’s growing cash glut a year ago, continued to bird dog the issue, and has been the only advocacy group also pointing to the various tax increases under Governor Northam as the main cause of the surpluses.

Northam is still in denial on that point, crediting the $2.6 billion surplus revenue last year and the similar surpluses now projected into the future to “unprecedented economic strength.”

Northam’s proposals may have caught some allies off balance, as many liberal advocacy groups have been opposing the idea of any tax cuts as misguided or damaging to key governmental priorities.

Youngkin’s tax proposals are superior to those offered by Northam in several ways. They are more  targeted at ameliorating the various tax increases that created the surpluses. In particular, Youngkin has adopted the Jefferson Institute’s key proposal to greatly increase the standard deduction allowed to all taxpayers who don’t use itemized deductions when calculating income tax.

The 2017 Tax Cuts and Jobs Act doubled the federal standard deduction and created a yawning gulf between the federal and state amounts. That is what caused income taxes to explode at the state level. Failure to adjust the state standard deduction will maintain those income tax increases on all taxpayers, in fact leaving even minimum wage earners subject to state income tax.

Northam proposes to lower the burden on them by enhancing the earned income tax credit (EITC). That means the state will continue to extract withholding paycheck to paycheck, and then taxpayers use a bureaucratic process to get some money back. It is far better to simply tax them less initially.

The real reason the EITC is the preferred tax “reform” for Democrats is it provides zero benefit to anybody above a modest income. The higher income taxes now imposed on middle and upper income taxpayers using the standard deduction remain in place for years to come. Youngkin’s proposal benefits far more Virginians.

Both Northam and Youngkin have now proposed one-time rebates, presumably to be paid sometime in 2022, similar to those sent out in 2019. Northam’s would be $250 for an individual and $500 for a married couple filing jointly. Youngkin’s is $50 higher per person. In neither case does such a payment constitute long-term tax reform, and future surpluses are not reduced by the step.

Both Northam and Youngkin have proposed a change in the sales tax on groceries (unprepared foods), already taxed at the lower rate of 2.5%. Youngkin would eliminate it, while Northam would forgo the state’s 1.5% but retain the 1% tax which is shared with the local governments. Many local governments are also facing an embarrassment of tax riches thanks to inflated prices on goods and real estate but are expected to cry poverty to any proposal to trim that sales tax on groceries.

Youngkin, however, has also proposed a one-year hiatus on the most recent 5- cent-per-gallon increase in the gasoline and diesel taxes. That is missing from the Northam proposal, even though transportation tax revenues are also producing unexpected surpluses. Also ignored is Youngkin’s proposed income tax exclusion for military retiree pay.

On his part, Northam has proposed an end to the practice of making certain larger retailers pay their sales taxes a month earlier than the normal schedule. That was implemented years ago as a pure accounting gimmick, boosting revenue in one year at the expense of the next. Fixing the payment schedule has a one-time revenue impact but doesn’t really save the retailer anything. For Northam to pass that off as a tax break is disingenuous (but he isn’t the first to do so).

The last time the state pulled that “accelerated sales tax” stunt and then reversed it, a member of the State Senate admitted in debate: “We have to fix this now so that we can do this again the next time we’re in a bind,” or something to that effect.

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30 responses to “Northam Blinks: State Tax Cuts Coming”

  1. One proposal would be to cut all DIE [diversity, inclusion, equity] positions at state colleges and universities resulting in a reduction of $3,024,879,000.

    1. Stephen Haner Avatar
      Stephen Haner

      I’ll be very surprised if no such amendment is offered. I suspect your decimal point may be misplaced…but maybe not by much.

  2. DJRippert Avatar

    Good column. Northam is proving to be a better soon-to-be-ex governor than he was a governor.

    1. It was nice to see the Youngkin spokesperson thanking Northam. We will have to see how long after actually taking office that the civility lasts.

  3. LarrytheG Avatar

    We expect Youngkin to be a fiscal conservative and I actually welcome that even though I may not agree with each thing he does… I approve of the process of lean and keeping taxes low relative to other states.

    At the same time, there are issues that need addressing like mental health which is hard to understand given the GA’s acceptance of the Medicaid Expansion.

    Where we might part company is on the culture war crappola… so we’ll see on that….

    He’s got a lot of folks “advising” him and he actually has an opportunity to steer Virginia further right and more purple unless he succumbs to the culture war stuff. We’ll see, for instance, how he approaches the COVID issue. Will he be more like Abbot and De Santis or more moderate?

    He can move right a little but too far and he screws the pooch.

    1. Stephen Haner Avatar
      Stephen Haner

      You’ll let us know when that is, I’m sure. 🙂 You may see some new resources in mental health when the details emerge Thursday. It is an area where I do worry that doing what we’ve always done may get us what we’ve always gotten. So intertwined with drug abuse, as well, with so many on the street refusing services because they can’t get the drugs when in formal care.

      Since the initial period, Northam has been quite hands-off on COVID compared to other blue governors. The masks in schools mandate can be attributed to the General Assembly passing that bill that directed schools to abide by CDC guidance. No state-specific mandates anywhere else.

      1. LarrytheG Avatar

        Is it a priority with Youngkin or is it more go along to get along business as usual?

        Like I said. He has some choices on how to proceed and I don’t doubt for a New York minute, he’s got the culture war zealots on his tail.

        He can truly change the way Virginia operates. – that is within his aim. It will be hard to do but since he’s not a long-time partisan, perhaps possible.

  4. Tax cuts… feel so GOOOOD!

  5. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    I am going to withhold judgment until I see the budget bill, especially the capital section. If he proposes using debt for capital, rather than cash, I want some of you financial experts to explain to me why it is best to borrow money and pay interest, than use cash.

    In addition, I would wonder if it would be possible to use some of that cash to pay off existing debt or to substitute for previously authorized, but not yet issued, bonds. Remember, reducing the debt reduces the need for GF to cover debt service in the future.

    1. James Wyatt Whitehead Avatar
      James Wyatt Whitehead

      Pay as you go Harry Byrd would agree. Might not be a bad idea.

  6. James Wyatt Whitehead Avatar
    James Wyatt Whitehead

    Canning the grocery tax is going to be a welcome lift to the working class Virginian making 15 bucks an hour and doing the work of 2 or 3 other people.

    1. LarrytheG Avatar

      see.. this is going to be a tax cut that is silent on where the spending cut will be… Shouldn’t both the tax cut and spending cut be included? Or is this yet another one of those “unfunded” mandates that get done to the localities?

      1. James Wyatt Whitehead Avatar
        James Wyatt Whitehead

        I don’t know Mr. Larry. But it is clear to me that eliminating the grocery tax will be great for families where the providers are just getting by and working hard to do that.

        1. LarrytheG Avatar

          Oh I agree. But how will the shortfall be made up? tax increases on others or spending cuts?

          what we don’t need IMHO is another Gil-Moron where local taxpayers are given tax rebates by the state and the state collects taxes to pay for it.

          1. James Wyatt Whitehead Avatar
            James Wyatt Whitehead

            Mr. Larry there is a surplus. No need to make a cut today.

          2. LarrytheG Avatar

            at the locality level? I thought if the sales tax was cut, it reduced their revenues, no?
            Is the state going to do a Gilmore-like rebate to keep the localities whole?

  7. Eric the half a troll Avatar
    Eric the half a troll

    “The 2017 Tax Cuts and Jobs Act doubled the federal standard deduction and created a yawning gulf between the federal and state amounts.”

    The key missing word here is “temporarily” and I suspect has ramifications when it comes to increasing the Va standard deduction. In short, the windfall automatically goes away in a few years.

  8. Stephen Haner Avatar
    Stephen Haner

    This has to be a first for the “accelerated sales tax” accounting gimmick. When a governor facing a shortfall proposes it, collecting year 2 revenue in year 1, he claims it is a way to raise revenue without actually increasing any tax. Now we have a governor claiming it is a tax cut in some way, a benefit to the taxpayers, when in fact it lowers state revenue not a single dollar. It is creative….I’ll give him that.

    1. Matt Adams Avatar

      Isn’t there a saying about rain and urination that would be apt here?

      It’s an attempt to keep the base energized and remove the possiblity of a slaughtering in 2 years.

  9. energyNOW_Fan Avatar

    Hope I get some tax back because I think I was in the middle income group targeted to pay more. Undoubtedly the payout will not be to those who had to paid in.

  10. LarrytheG Avatar

    I wish I could have my income taxed at carried interest rates … that would be Wonderful! If Youngkin would propose that, I would be very impressed.. 😉

    1. Stephen Haner Avatar
      Stephen Haner

      You too can get the capital gains rate on any such investment. Qualified dividends are also taxed lower than earned income. As somebody who prepares returns, I suspect you already knew that.

      1. LarrytheG Avatar

        I did and I’m envious and wonder why I can’t get that tax rate… like others…

        And I still think it would be a heck of a thing for Youngkin to offer for us all!


  11. Nancy Naive Avatar
    Nancy Naive

    Money baby, money… kinda like “Burn baby, burn” but with a greater sense of gravitas with Republicans.

  12. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    One aspect of the cut in the 1.5 percent in the state tax on groceries that has been over looked in this discussion is the current distribution of the revenue from that tax. One percent is the state share of sales collections that gets redistributed to localities for education. In the second year of the biennium, that would amount to about $262 million. Without any action by the General Assembly, that would represent a reduction to localities in SOQ funding. In his remarks, Northam said that the state would make that up. Presumably, that means additional GF in the budget for K-12.

    The remaining half cent goes to transportation. That would be about $133 million a year. Northam said the state would not make that up; rather, federal funding in the new infrastructure bill recently signed by the President would cover that. Either way you look at it, that is a reduction in revenues that could have been expected for transportation.

    1. LarrytheG Avatar

      and to note that Northam proposed this initially in 2017;

      ” Northam is proposing four changes to tax policy:

      Eliminating the state sales tax on groceries. Northam first proposed eliminating grocery tax on low-income individuals when he ran for governor in 2017. The state grocery tax is 1.5%. Most states do not tax groceries. This proposal does not affect local revenues.”

      I’m not sure how it might have been implemented, but it could have been a refundable tax credit based on their income.

      A similar approach could be done for other taxes said to be “regressive” like the fuel tax.

      In both cases, provide a default credit based on income and/or allow for saved receipts.

      The idea that the sales tax would be completely cut across the board .. AND THEN the state would send rebates back to the localities has a Jim Gilmore aspect to it which I continue to say is wrong/bad policy and you can see it in the way that car taxes are done now.

      They ought to repeal that law IMHO and let localities
      deal with the taxes they need to levy for their expenses – and be held accountable on that basis.

  13. DJRippert Avatar

    Dear Governor-Elect Younkin:

    This may surprise you but I have seen a project proposed by President Joe Biden that I think could be applied in Virginia. To wit:

    Please keep some of the surplus for a similar effort. Dealing with the Virginia state government is a descent into hell worthy of Dante. The DMV is particularly ghastly.

    Allocate some of surplus for a thorough re-engineering of the strategy, processes, measurements and systems that the state of Virginia uses to interact with its citizens. There are several reasons why this is important:

    1. Our state is a backwards mess when it comes to state / citizen interaction.
    2. This can show meaningful results during your term in office.
    3. A large number of citizens will be affected and positively view progress in cleaning up the is mess.
    4. Once streamlined and automated, the state processes will not only result in higher customer / citizen satisfaction they will also cost less (particularly in personnel) to operate. In the mid to long term, this will save Virginia money.

    Thank you,


    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      The callback option is a good idea. It would particularly be appropriate for those agencies with which citizens interact a lot such as the Virginia Employment Commission. You must have had a bad experience with DMV. I have never had any problems with that agency, although I admit that I have not tried phoning them. My dealings have been on-line or in person.

      It is not only governments that provide a descent into hell. Recently, I needed to talk to someone at Cigna, which has taken over the company that had provided my Medicare prescription insurance. The message said that the wait would be “more than 20-40” minutes. Three hours later, I was still on hold. (Luckily, I was able to turn on the mic on my mobile phone and just lay on the table while I did other stuff.) I realize that this was in the waning days of open enrollment and lots of people were calling in. But, you would have thought that a national company would have anticipated that and put on extra personnel to handle the calls.

      1. LarrytheG Avatar

        Human beings on call-back are very expensive. Anyone who has tried to get in touch with their cable or phone providers know that DMV and other govt have strong competitors.

        On top of that, we have folks who will believe a phone call from the IRS to send the caller a gift card and worse.

        The Medicare and Social Security – as well as the DMV websites are not terrible. You do have to get login credentials and that means requirements for harder passwords than “Sam” or “Meow” AND you have to remember them AND you have to be comfortable on learning to get a new password when your original no longer works ( which all 3 will “age’ out and require new ones.

        This is where the digital divide rears it’s ugly head.

        Young folks know the drill and roll with the punches. Older folks and folks not familiar or comfortable with technology will struggle and fail and demand a human person to talk to – which is not a good option these days as the costs for providing that level of service is apparently prohibitive for both govt and private sector.

        Talk to anyone who has had to deal with the cable or direct tv or similar these days – in terms of getting to a human… good luck on that…

    2. how_it_works Avatar

      My last visit to the DMV, I had to transfer the ownership of two vehicles from my dad’s estate to me.

      This took well over an hour, and much of it was spent filling out forms with information that the DMV already had.

      How hard could it be for the DMV, when they print those forms at the window, to pre-fill them with that information? (Well, aside from the fact that the “Bubbas” that dominate Virginia government tend not to be too tech-savvy..)

      It would save a LOT of time.

      But I get the impression that reducing the amount of “busy work” required in any interaction with the state is the LAST thing they want to do.

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